How Capital-Based Instruments Facilitate the Transition Toward a Low-Carbon Economy : A Tradeoff between Optimality and Acceptability
This paper compares the temporal profile of efforts to curb greenhouse gas emissions induced by two mitigation strategies: a regulation of all emissions with a carbon price and a regulation of emissions embedded in new capital only, using capital-b...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2013/09/18269228/capital-based-instruments-facilitate-transition-toward-low-carbon-economy-tradeoff-between-optimality-acceptability http://hdl.handle.net/10986/16837 |
| Summary: | This paper compares the temporal profile
of efforts to curb greenhouse gas emissions induced by two
mitigation strategies: a regulation of all emissions with a
carbon price and a regulation of emissions embedded in new
capital only, using capital-based instruments such as
investment regulation, differentiation of capital costs, or
a carbon tax with temporary subsidies on brown capital. A
Ramsey model is built with two types of capital: brown
capital that produces a negative externality and green
capital that does not. Abatement is obtained through
structural change (green capital accumulation) and possibly
through under-utilization of brown capital. Capital-based
instruments and the carbon price lead to the same long-term
balanced growth path, but they differ during the transition
phase. The carbon price maximizes social welfare but may
cause temporary under-utilization of brown capital, hurting
the owners of brown capital and the workers who depend on
it. Capital-based instruments cause larger intertemporal
welfare loss, but they maintain the full utilization of
brown capital, smooth efforts over time, and cause lower
immediate utility loss. Green industrial policies including
such capital-based instruments may thus be used to increase
the political acceptability of a carbon price. More
generally, the carbon price informs on the policy effect on
intertemporal welfare but is not a good indicator to
estimate the impact of the policy on instantaneous output,
consumption, and utility. |
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